USD/JPY surges to the highest level since 2002, retakes 126.00 mark on Kuroda’s remarks

• USD/JPY gained strong traction on Wednesday and jumped to its highest level in two decades.
• The divergent Fed-BoJ policy outlook continued weighing on the JPY and remained supportive.
• The USD held steady near the YTD peak and further contributed to the pair’s strong move up.

The USD/JPY pair caught aggressive bids during the early European session and surged past the 126.00 mark for the first time since May 2002.

Following the previous day's good two-way price moves, the USD/JPY pair regained positive traction on Wednesday and was supported by a combination of factors. A goodish recovery in the risk sentiment - as depicted by a generally positive tone around the equity markets - undermined the safe-haven Japanese yen. This, along with the big divergence in the monetary policy outlooks between the Fed and the Bank of Japan, further drove flows away from the JPY.

In fact, Fed Governor Lael Brainard said on Tuesday that the US central bank will proceed with a series of interest rate hikes, as well as an effort to trim its balance sheet. The comments followed the release of the US consumer inflation figures, which showed no signs of easing in March and accelerated to levels last seen in 1981. The Fed's hawkish stance pushed the US dollar to a nearly two-year high and acted as a tailwind for the USD/JPY pair.

Conversely, the BoJ Governor Haruhiko Kuroda reiterated to sustain the current powerful monetary easing to support economic recovery. This was seen as a key factor behind the latest leg of a sudden spike over the past hour or so, taking along some trading stops near the 125.75-125.85 region (the previous YTD high and the 2015 peak). Hence, the momentum could also be attributed to some technical buying, warranting caution for bulls amid overbought conditions.

Market participants now look forward to the US economic docket, featuring the release of the Producer Price Index later during the early North American session. This, along with the US bond yields, will influence the USD price dynamics and provide a fresh impetus to the USD/JPY pair. Traders will further take cues from the broader market risk sentiment to grab some short-term opportunities.

Technical levels to watch